Long-run Effects of Monetary Policy of China on Its Economic Growth

Abstract

Despite considerable reforms of Chinese monetary policy, very few papers have empirically examined the long-run effects of monetary policy on China’s economic growth. Our purpose is to shed some light on it. We use money supply, real effective exchange rate, and real interest rate to describe monetary policy of China. We first apply the Granger causality test to annual data from 1980 to 2020 to examine the relationship between monetary policy and China’s economic growth measured by Chinese real GDP. Our results suggest both money supply and real effective exchange rate Ganger cause Chinese real GDP, while real interest does not. We then adopt the autoregressive distributed lag (ARDL) model without asymmetric effects and nonlinear ARDL with asymmetric effects of exchange rate to estimate the impact of monetary policy on China’s economic growth. Our long-run results indicate that expansion of money supply would promote Chinese real GDP growth. Both higher interest rate and depreciation would hinder China’s economic growth. There are asymmetric effects of exchange rate on growth. Finally, the CUSUM and CUSUMQ stability test results reveal that the relationship among money supply, real effective exchange rate, and real interest rate with Chinese real GDP is stable.